Trade Alert: Black Gold

And under-the-radar company in the oil sector with excellent fundamentals

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Earnings Trade Update

Before we get to our oil stock, a couple of updates on the earnings trades front. The firm we’ve been using for social data, LikeFolio, only has one earnings trade this week, one they’re bearish on. But Zacks has a positive earnings Expected Surprise Percentage for it, so I’m passing on the trade.

Also, given our recent rough patch with social data-based earnings trades, I contacted the founder of SqueezeMetrics over the weekend to see if their gamma exposure and dark pools data might give us an edge on earnings trades (the founder and I were both Seeking Alpha contributors and did some business together in the past). I gave him a couple of stocks that LikeFolio and Zacks got wrong last week, and his system didn’t get them right either, he said. More generally, he didn’t see his kind of data offering much of an edge on earnings trades.

His site is currently closed to new users, but I’ve been demoing a site that uses similar options and dark pool data, SpotGamma, to see if it might be useful for us for other types of trades. I’ll keep you posted on that.

In the meantime, I’ve identified an attractive bullish target.

This Could Work As Buy-And-Hold Too

The COVID lockdown of 2020 was a real-life stress test for the oil industry. With much of the economy shut down and most office workers working from home, road traffic plummeted, and oil prices crashed.

The company we’re betting on today passed that test with flying colors: not only did it generate positive earnings in 2020, but it kept paying dividends (albeit, at a reduced amount) throughout the crash.

Today, its fundamentals are excellent.

It has a Piotroski F-Score of 8 (on a scale of 1-9, where 9 is best), and Chartmill gives it an aggregate fundamental rating of 8. It also has a strong chart: Chartmill gives it a technical rating of 8 as well.

With all of its production in the U.S., this company avoids the political risk associated with global oil companies, and its small size lets it target fields that wouldn’t move the needle for oil majors. I’m thinking of buying shares in this one was a buy-and-hold at some point, but the trade idea I have in mind now is one that can more than double our money if this stock continues to rally this year. If it just goes sideways from here, we can still make a modest profit. Details below.

The company is Evolution Petroleum (EPM 0.00%↑), and here’s today’s trades:

1. A vertical spread expiring on October 20th buying the $7.50 strike calls and selling the $10 strike calls for a net debit of $0.93. The max gain on 4 contracts is $628, the max loss is $372, and the break even is with EPM trading at $8.43 (it’s trading at $8.08 as I type this).

2. Selling the $7.50 puts for a credit of $0.80. The max gain on 2 contracts is $160, the max loss is $1,340 (this assumes the puts are exercised and you buy the stock at $7.50, and then the stock goes to $0), and the break even is with EPM trading at $6.70. This trade hasn’t filled yet, but is open good ‘till canceled. This trade filled at $0.80 on 9/13.

Exiting The First Trade

For each debit spread trade, I’m opening a Good ‘till Canceled limit order to close it at a net credit of about 90% of the spread (the difference between the strike prices of the options). In the first trade above, we have a $2.50 spread ($10 - $7.50), and 90% of $2.50 is $2.25, so that’s where I’ll be placing my limit order to exit it. If that order doesn’t get filled over the next few months, I’ll lower the limit price as necessary as we get closer to expiration.

For the second trade, selling the puts, there’s no exit. If the trade fills, and the stock isn’t trading below $7.50 when the puts expire, we’ll keep the credit and that’s it. If it is trading below $7.50, we’ll keep the credit and buy 200 shares of the stock at $7.50. Since it’s a stock I’d feel comfortable buying and holding at over $8, I’d be okay with buying it and holding it at $7.50.

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